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ORSA - Defn
Internal assessment process, tailored to insurer’s own risk profile and appetite, and reflective of the nature, scale and complexity of the insurer.
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ORSA - Key elements and considerations
- Comprehensive Identification and Assessment of Risks
- Relating Risk to Capital
- Board Oversight and Senior mgt Responsibility
- Monitoring and Reporting
- Internal Controls and Objective Review
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Comprehensive id and Assessment of Risks
- id and assess all material risks that could have material impact on financial health
- captured in regulatory test or not
- assess under normal and adverse scenarios
- consider concentration/interaction
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Insurer should consider materials from other researchers for own capital needs
materials on quantification of risks and mitigants from: - Regulators, prof associations, cocnsulting firms
- Empirical data and studies of historical and potential new risks in dif markets
- Developments in insurance and impact on continued appropriateness of current tools, data, assumptions
- Bench-marking wrt. risk measurement, in insurance sector or other similar sectors
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Relating Risk to Capital
- Tailor to nature, scale and complexity of insurer.
- Determine capital requirements (by risk, aggregation/diversification)
- Set internal targets
- Integrate with other business areas
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Board Oversight and Senior mgt Responsibility
- Board:
- ultimate responsibility
- ensure Sr mgt implement properly
- understand impact of adverse events on financial condition
- Sr mgt:
- implement, mgt
- report findings to Board
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Monitoring and Reporting
- performed regularly to provide relevant info for mgt processes
- regular reports for sr mgt / Board
- formal report to Board
- info on process, methods, assumptions relative to risk appetite, strategic plans etc.
- enables Board to assess approrpiateness of ORSA
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Internal Controls and Objective Review
- Internal controls to ensure consistent with risk appetite
- review process to ensure ensure risks haven't changed and process to quantify risks still adequate.
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Areas in insurer's own regular review of ORSA
- Comprehensiveness of assessment
- Process for id risks, concentrations and interactions;
- Appropriateness of methods and data;
- Reasonableness of results
- Consistency with risk appetite;
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Areas in Supervisory review of an insurer’s ORSA
- Methodology and data supporting estimates of risks in regulatory capital;
- Risks not in regulatory capital (reputation and strategic risk);
- External factors incl stress testing
- Limitations of ORSA
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Comprehensive id and Assessment of Risks - Risk considerations
- Emerging/Evolving risks
- Risk transfer/Mitigation (Reinsurance)
- Cross border activities (concentration risk, forex risk)
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Relating Risk to Capital - ORSA practices
- Internal models to assess material complex risks, when not available, simpler approaches with conservatism
- Risks hard to quantify: use expert judgement
- Advanced methods to assess risks for competitive advantage
- Methods to agg results and consider concentrations and interactions;
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Situations in which risk concentrations, dependencies and interactions can arise include exposures to:
- One severe event
- One reinsurer
- One product
- One distributor
- Geographical regions
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ORSA vs. DCAT
- similarities:
- involve scenario/stress testing to id risks
- submitted to regulators
- done annually
- forward looking
- risk-based capital assessment
- differences:
- DCAT follows CIA SoP; ORSA follows OSFI guideline
- DCAT is AA responsibility; ORSA is mgt responsibility
- DCAT is mostly quantitative; scope of ORSA is large also incl qualitative analysis, governance and internal controls.
- DCAT covers only prescribed risks; ORSA covers all relevant risks
- DCAT is to demonstate satisfactory financial condition; ORSA process is to ensure appropriate ERM
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ORSA vs. MCT
- ORSA considers more risks than MCT and includes all material risks
- ORSA allows for a better qualitative assessment (e.g. internal control); MCT is only quantitative
- ORSA is tailored to risk profile (internal target); MCT is a formula-based approach not company-speific
- ORSA considers correlations between all risks; MCT only considers correlation between insurance and asset risk
- ORSA incl assessment of internal controls to allow for better mgt of business
- ORSA sets internal target to reflect own risk appetite
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